On Tuesday, an anonymous Seeking Alpha contributor posted a critical piece about Parametric Sound (PAMT), which was subsequently syndicated on Yahoo Finance, sparking a precipitous selloff in shares.
(If you haven't read it yet, please do so here.)
I've actively recommended the stock to my subscribers. So, I put together this point-by-point rebuttal, which should be of interest to any current and potential investors in the company.
1. Technology Development is a Process, Not An Event
The article tries to down play the disruptive potential of PAMT's technology by suggesting it's old. It's true. Mr. Norris has been talking about the technology in a general sense for the better part of 15 years. But it's not the same technology today as it was back then.
If the contributor spent any time researching the stock, he'd quickly learn PAMT meaningfully improved its technology in November 2011. Specifically, it developed the algorithms required to reduce distortion levels, enough to open up opportunities in consumer markets, not just digital signage.
This process of development is consistent with some of the greatest inventions of all time. Somehow, though, we're supposed to overlook such a reality.
Take the light bulb, for instance. The technology was 30 years old by the time Thomas Edison developed it into a commercially available product. And it took him over 1,000 tries.
Did the length of the process make the ultimate technology any less disruptive? Not hardly.
Or take cloud computing. The visionary Steve Jobs talked about it in 1997 (see here). Does that make cloud-computing technology old and irrelevant? Again, no.
Same situation with PAMT. Mr. Norris' initial technology might be old in the sense that it was originally conceived years ago. But it's the latest developments that ultimately matter and hold the most promise.
The attempts to discredit the technology by citing old research (from 2005 and 2007) are also irrelevant. The studies are not based on the current technology.
Bottom line: The increased fidelity of the sound produced by PAMT's latest emitters opens up additional market applications that didn't previously exist. The fact the technology is developing and progressing should be embraced, not panned as a reason to ignore it.
2. Managers or Magicians?
The next claim - "Management relies on a demonstration with a hidden subwoofer to make investors believe the technology can produce a full range of sound" - couldn't be more bogus.
When I tested the speakers, management disclosed that a subwoofer was present. During the demo, they even instructed me they were going to turn off the subwoofer so I could hear the sound without it.
Under both conditions, I assure you the speakers create a 3-D sound, unmatched by any other speakers I've ever tested. I'd buy the speakers without thinking if I could right now. And I wouldn't blink an eye if it cost me $1,000 or more. They're that unique.
Management also freely spoke about the speakers' frequency limitations - flat to 300 Hz, with a drop-off beginning at 250 Hz.
My experience isn't an isolated one, either. I watched management conduct the same honest demo with at least 20 other institutional analysts and investors. The Seeking Alpha contributor must have been the only one to experience "an almost painful, tiny ring."
Everyone I watched demo the speakers sat in amazement at what they were hearing. Unless that was some "parlor trick," too, whereby, management somehow convinced them to smile with disbelief and enjoyment when they actually were feeling pain.
Sorry. But management isn't trying to pull off any magic. Moreover, the need for a subwoofer doesn't suddenly render the technology unattractive, either.
Bottom line: The dynamic range of the speakers is on par with "traditional off-the-shelf speakers," as MDB Capital concluded in a recent report.
The need for a subwoofer brings the total components in the system to three. That's much less complex than anything else on the market. In addition to the sound experience, I expect consumers will view the limited number of components as a compelling selling point, too. Not a drawback.
3. It's Not All About Gaming
The article goes to considerable lengths to convince us the speakers aren't suitable for the gaming market.
Why? Because serious gamers want serious bass. But apparently people that live with serious gamers don't want to hear the serious bass. So the need for a subwoofer is going to be an irritation to anyone who lives with a gamer. Therefore, no gamers are going to buy it.
I fail to see how this argument is remotely relevant. The $68 billion video game market doesn't fit into Occupy Wall Street's model of the world. Serious gamers don't make up 99% of it, with non-serious gamers only accounting for 1%.
I'm not going to waste the time to figure out how many billions of dollars of sales come from non-serious gamers, who wouldn't object one bit to paying for the speakers. Instead, let's take the bait and rule out the gaming market completely.
What happens when we do? PAMT's technology still applies to multiple, multi-billion-dollar market opportunities, including:
• Mobile Devices: In 2011, 1.77 billion mobile devices were sold, up 11.1% from 2010. For 2012, technology research firm Gartner expects the market to grow to almost two billion units.
• Healthcare: Over 35 million Americans suffer from hearing loss. Those ranks are all but guaranteed to swell as the Baby Boomers continue to age. In 2011, the U.S. hearing aid and audiology device market alone was valued at $5.7 billion, according to iData Research.
• Kiosks and Point-of-Sale Terminals: There are currently 1.6 million interactive kiosks in the world. ABI Research expects the market to almost double to three million units over the next five years.
• Casinos: There are 840,000 electronic gaming machines in North America and 4.2 million globally. Annual revenue for the U.S. gaming equipment sector topped $11 billion in 2010.
• Personal Computers: The PC might be dying, but there are still close to 400 million new units sold each year. PAMT's technology could be incorporated directly into computers or sold in aftermarket speakers.
• Television: The global television market accounted for almost $20 billion in sales last year. By 2015, IHS iSuppli Research expects flat-panel TV sales alone to top 275 million units. PAMT's technology could be integrated directly into televisions or sold as part of a home theater audio solution.
• Home Theater: The global loudspeaker market is expected to be worth $4.5 billion by 2017, according to Electronics.ca research. A significant replacement market opportunity exists, as global consumers spend over $1 billion per year on loudspeakers. Current surround sound systems typically include seven speakers, compared to PAMT's two, yet still can't produce a similar user experience.
• Movies and Cinema: There are approximately 40,000 movie screens in the United States, according to the National Association of Theater Owners. Much like 3-D films, PAMT's 3-D sound holds the potential for theater owners to charge a premium.
Bottom line: The objection to the opportunity in the gaming market is laughable, at best. It's not critical to the company's success, either.
We're talking about roughly a $50 million market cap company, here. Even the smallest modicum of penetration in any of these massive markets promises to transform the company's financials.
4. All Patents Are Not Created Equal
In addition to trying to discredit PAMT for having "old" technology, the post also calls into question the strength of the company's intellectual property.
It does so by saying "competitors, potential licensees and a patent troll" all possess related patents "which will greatly reduce the company's negotiating power."
Such an argument assumes all patents are created equal. That's just not the case. Some patents are much more valuable than others. The most valuable patents are foundational patents - ones an entire technology is built upon.
Guess what? The foundational patent in PAMT's industry is Patent # 6,044,160, "Resonant tuned, ultrasonic electrostatic emitter," according to MDB Capital. And the patent was filed by Mr. Norris and assigned to PAMT.
In a testament to my earlier point that PAMT continues to develop it's technology, the company just received another patent this week, bringing its total up to 23 patents and 4 pending.
Bottom line: I'll be the first to concede I'm not a patent expert. But MDB built its business on accurately assessing the quality of companies' intellectual property. And they contend that any suggestion PAMT's IP is weak is "wholly misplaced."
On this claim, investors have a choice. Piggyback MDB's experience and research. Or rely on some anonymous person's random searches on the USPTO website. Considering we're putting hard-earned capital on the line, I don't think it's a tough decision, do you?
5. Sales-Poor Companies Don't Get Sued
The article also says PAMT "is not well capitalized for a development stage venture," and warns a single patent defense would exhaust at least 50% of its cash.
What a minute? I thought he just said PAMT had weak IP? Why would a company with weak IP get sued? It wouldn't.
Since PAMT has strong IP, it could technically get sued. But, that's unlikely anytime soon. Companies with minimal sales and licensing revenue don't get sued. Potential litigants wait until there is money to be paid out. In the here and now, patent litigation poses no threat to PAMT's cash balance.
Bottom line: At the end of the second quarter, PAMT's cash balance stood at $6.5 million. Given its monthly burn rate of about $250,000, that's more than two years worth of working capital. That qualifies as well capitalized for a development stage or mature company.
6. It's the Software, Not the Hardware
The last claim in the article is that there are weak barriers to entry, as evidenced by the fact a directional speaker can be produced "with off-the-shelf components or hobby kits by anyone." That's true. But it's also irrelevant.
As I said from the outset, PAMT's disruptive technology is in the software. Specifically, its signal processing algorithms. Criticizing the company's hardware is nothing more than an attempt to distract from what's important.
Don't believe me? Spend two minutes on any other leading speaker manufacturer's website and you'll see they don't talk about their hardware much. It's about the software.
Take Bose, for instance. The first thing it talks about is the software technology, which "remains at the heart of the performance," and the "digital electronics (which) fine-tune the sound for accurate music reproduction across a wide range of volume levels."
Bottom line: PAMT's disruptive technology rests in the company's software, not the hardware. And it can't be purchased at your local Hobby Lobby or Office Depot.
The recent dip in prices should be treated a chance to add to an existing position or initiate a new one. Especially since PAMT secured a customer in Build-A-Bear Workshop stores (see here).
And from here on out, I'll let the market be the final arbiter in this debate.